The principal debtor may avail itself of any standard contract defenses as against the creditor, including impossibility, illegality, incapacity, fraud, duress, insolvency, or bankruptcy discharge. However, the surety may contract with the creditor to be liable despite the principal’s defenses, and a surety who has undertaken the suretyship with knowledge of the creditor’s fraud or duress remains obligated, even though the principal debtor will be discharged. When the surety turns to the principal debtor and demands reimbursement, the latter may have defenses against the surety—as noted—for acting in bad faith.
One of the main reasons creditors want the promise of a surety is to avoid the risk that the principal debtor will go bankrupt: the debtor’s bankruptcy is a defense to the debtor’s liability, certainly, but that defense cannot be used by the surety. The same is true of the debtor’s incapacity: it is a defense available to the principal debtor but not to the surety.
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